Choice Overload: Why Is Less Considered More?
Having too many options can be detrimental to decision-making, especially when it comes to finances.
What Is Choice Overload?
Behavioral finance finds that several factors affect our ability to make sound financial decisions. Although the freedom to choose is good, having too many options may not be as beneficial. Choice overload (also known as over-choice) refers to the unfavorable effect of having too many alternatives.
Having too many options often leads to delayed decision-making and dissatisfaction with the final decision. The modern world floods us with alternatives that cater to different personal preferences, and choice overload is more common than ever.
Choice overload can occur when deciding what to order in your favorite coffee shop or determining the best auto insurance company. Understanding how to deal with it can help you make better financial decisions without being overwhelmed by anxiety or succumbing to herd instinct.
Why Does Choice Overload Happen?
Have you ever had so many options that you felt paralyzed and ended up not choosing anything? That's a common consequence of choice overload, which is failing to make the most rational decision in the face of having too many alternatives. Choice is not a bad thing. But when there are too many choices, the decision-making process can be overwhelming.
Choice overload is less daunting when you have prior knowledge about your options or existing preferences. You're also less likely to experience it when an immediate decision isn't necessary. Unfortunately, we don't always have ample information and limitless time for the choices we must make.
Every decision takes up mental energy, and when we run out, we're more likely not to make one, resulting in delay. Extensive options also lead to higher expectations. We feel disappointed and frustrated when the outcome doesn’t meet these expectations.
Some people want to seek out all possible alternatives, but with nearly limitless options these days, it may create more harm than good. There are also situations wherein we're not clear about what we want. The entire experience becomes overwhelming when you combine it with too many options.
The effects of choice overload may lead to choice paralysis. Either we delay deciding because we've exhausted our mental resources by making earlier decisions, or we abandon the decision-making task entirely, choosing none of the available options. Unfortunately, the choices that take the most energy impact our lives the most — starting a business, getting married or shifting careers.
In situations when we do decide, it lowers the quality of our decisions, leaving us dissatisfied. The mere presence of too many options increases the likelihood of buyer's remorse and anxiety, negatively affecting our overall well-being.
Your financial decisions aren't immune to the effects of choice overload. Commodities aren't the only things with nearly-limitless options — financial products are catching up quickly. Getting overwhelmed by the number of personal loan lenders, insurance providers and retirement plans available is normal.
Fortunately, there are strategies you can apply to your life to combat choice overload. These include having clear long-term goals, researching and narrowing down your options. MoneyGeek's guide explores these methods further.
Predictors of Choice Overload
Choice overload is a phenomenon you're bound to encounter several times in your lifetime. That said, it doesn’t affect every choice you make. Several factors must be present for it to affect your decision-making.
A 2014 study by Northwestern University narrowed it down to four specific elements: how complicated the decision is, how difficult the situation is, how well you understand your preferences and how clear your main objective is.
How This Impacts Your Decision-Making
Complexity of Choices
The more complicated the decision-making process, the more likely you'll experience choice overload. For example, Bank X offers ten different financial products, each of which has two options. In comparison, Bank Y offers only three financial products, each with eight options. The latter is a more complex decision and can trigger it.
This factor doesn't pertain to the actual task of deciding but the situation surrounding it. The significance of a decision and the time you have to make it affects its difficulty level.
Let's say you're at the supermarket buying shampoo. You have two large bottles at home but wanted to purchase a small one for an upcoming trip. Despite the number of available brands, you're unlikely to experience choice overload. In comparison, you'll probably experience the phenomenon if you must choose between three wedding reception venues, each with different costs, within the next two days.
Having a firm grasp of your preferences can make decision-making easier. For example, if your primary criteria for selecting the best auto insurance company is budget, having a range in mind lets you quickly narrow down your options without getting overwhelmed. However, you're open to everything if you're unsure about your preferences. You'll end up considering every single alternative because they're valid possibilities.
When faced with multiple options, ask yourself, "What is my end objective?" If you're browsing, gathering information for a choice you don't intend to make right now is a good idea. Then, you're less likely to experience choice overload when it comes time to make the decision.
An excellent analogy is going to the mall to purchase a new oven versus visiting multiple appliance stores to see what models are available. If you intend to buy something during the initial store visit, you'll likely experience choice overload.
Examples of Choice Overload
Choice overload is a phenomenon that occurs in various environments. It can happen in mundane situations, such as a run to your local supermarket. You may also experience it when evaluating big-ticket items or retirement plans. Our guide shows three specific situations.
Choice Overload Example: Less Jam, More Money
In 2000, Iyengar & Lepper completed a study involving gourmet jam. They wanted to see whether having more variety would lead to higher sales. To make the determination, they created two different displays. The first display offered 24 types of jam, while the second display only showed six.
The results were surprising. Although the display with more variety attracted more customers, only a few returned to make purchases — 3% to be exact. They had fewer customers when only six types of jam were displayed, but 30% of those customers made purchases. It showed that offering fewer options led to higher revenue.
Choice Overload Example: Scary Supermarket Aisles
A visit to your local supermarket can be stressful and time-consuming. Imagine going shopping for one or two items and walking out of the store over an hour later.
During your shopping trip, you go down one aisle. You find 85 different cracker brands, 95 snacks and 285 kinds of cookies. Something that could have taken two minutes now requires around 20 minutes of your time as you try to determine what brand will satisfy everyone in your household.
Having to deal with too many alternatives can cause anxiety. As a solution, supermarkets can give their customers a better experience if they offer fewer brands.
Choice Overload Example: Increasing 401(k) Participation
There's no ideal age to start preparing for retirement, but you're never too young. Signing up with your employer's 401(k) is an excellent way to begin. Not only does it ensure a nest egg in your golden years, but you can also choose where to invest your funds. Who wouldn't want to participate?
As it turns out, choice overload also affects participation in retirement plans, as Sethi-Iyengar, Huberman and Jiang discovered in their 2004 study.
In this study, it wasn't that people didn't see the value of having a 401(k). They saw the value, but selecting between multiple investment options that could significantly impact their retirement money was overwhelming. They found that with every ten or more fund options, there was a 1.5% to 2% decrease in participation. In comparison, employers that offered less than ten investment options had more participation.
Overcoming Choice Overload
Choice overload may lead to poor financial decisions. It is crucial to learn how to minimize its effects. Fortunately, you can use several strategies to combat it, including having a clear long-term perspective, researching and narrowing down your options. MoneyGeek's guide explores these further.
We've identified the different factors that contribute to choice overload. Logically, taking some of those elements away may bring positive outcomes. For example, the lack of time makes deciding more complex, so giving yourself more time before making a choice may reduce the effects of choice overload.
What makes a situation challenging is evaluating alternatives and coming up with a choice in one sitting. Perhaps a better approach is to spend one day exploring your options, allowing yourself time to compare them without feeling pressured. You can save the actual decision-making for another time.
Information is a powerful tool to reduce the impact of choice overload. Knowing the benefits of each option is one important step in the decision-making process. Understanding your objective is also critical. MoneyGeek's guide provides additional strategies below to help narrow your choices and remedy any feelings of being overwhelmed.
Examine Your Preferences
Before you even look at your options, take the time to examine your personal preferences first. This can help you narrow down your options quickly. It's particularly effective when selecting between consumer goods, which may have more variants than other goods.
For example, knowing that you prefer low-fat milk automatically removes all other alternatives. You might still need to go through several brands, but it significantly decreases the complexity of your decision. The more specific your preferences are, the better off you'll be.
Read Product or Service Reviews
When you're clear about your preferences, it's time to take a closer look at the different alternatives. Sometimes, however, the decision can still be challenging, especially if you have little to no experience with certain products.
A 2012 study by Morrin, Broniarczyk and Inman on 401(k) participation found that more individuals chose to enroll in employer-sponsored retirement plans when their description showed star ratings. What does this tell us? The more knowledgeable you are about the available options, the less likely you'll perceive the task of decision-making as daunting. As a result, it reduces the effects of choice overload.
Looking for credible sources of information is an excellent way to obtain more subject-matter knowledge. Typically, the product or service reviews are more reliable than what a brand or item's website advertises. A former customer can give you more clarity on its benefits and drawbacks.
You can then see whether these align with your preferences. If they do, keep them as options. If not, take them off the list of possibilities. Following this process helps limit your choices.
Establish a Goal
At the root of every decision we make is an objective. Your goal is your anchor because you can evaluate all options while using it as a standard. Typically you'll find that the best decision in a situation is the one that brings you closer to your end objective.
Choice Overload FAQ
Choice overload is a common phenomenon that affects your ability to make decisions in various situations. MoneyGeek’s guide includes commonly asked questions regarding this aspect of behavioral finance to provide you with additional information.
MoneyGeek reached out to subject matter experts to get their thoughts about choice overload. Their insights and advice may provide further context about this subject.
- Studies show consumers with expertise in specific fields have an easier time with multiple choices in their given field. Can regular consumers emulate this ease through reading/watching product/service reviews?
- What tips can you give ordinary Americans to help them overcome choice overload?
Professor of Psychology at the University of Illinois at Urbana-Champaign
Associate Professor and Director of the Sustainable Economic and Enterprise Development (SEED) Institute
Associate Professor and Chair of Finance and Economics at Nova Southeastern University
CEO of FlooringStores, Inc.
COO of Pala Leather
Co-Founder & Technical Lead at Fig Loans
Personal finance isn't just about creating budgets and understanding various concepts like insurance, loans and mortgages. Managing your finances well also involves understanding how psychological factors such as choice overload affect decision-making. MoneyGeek provides you with additional resources regarding concepts related to behavioral finance.
- Anchoring Bias: This behavioral finance concept explores how you use the initial information you receive to make financial decisions.
- Rational Choice Theory: Explore this school of thought that believes people make decisions based on analytical thinking. Individuals weigh the pros and cons of options and identify which brings them closer to their objectives.
- Mental Accounting: Learn about Mental Accounting bias and how it can lead to poor financial decisions. MoneyGeek explores the different approaches to overcoming bias.
- 6 Reasons That Influence You Buying Car Insurance: Finding the best car insurance policy for your needs involves gathering and comparing essential information. In your search, be aware that several mental biases may affect your final choice.
- How Sleep Impacts Your Career and Finances: The body needs time to rest and recharge. Lack of quality sleep doesn’t just affect you physically — it also affects your mental resources, which may inadvertently impact career and financial decisions.
About Nathan Paulus
- Iyengar, S. and Lepper, M. "When Choice is Demotivating: Can One Desire Too Much of a Good Thing?." Accessed July 9, 2022.
- Schwartz, B. (2005). "The Paradox of Choice: Why More Is Less." Accessed July 9, 2022.
- Chernev, A., Böckenholt, U., and Goodman, J. "Choice Overload: A Conceptual Review and Meta-Analysis." Accessed July 9, 2022.
- Morrin, M., Broniarczyk, S., and Inman, J. "Plan Format and Participation in 401(k) Plans: The Moderating Role of Investor Knowledge." Accessed July 9, 2022.
- Sethi-Iyengar, S., Huberman, G., and Jiang, W. "How Much Choice is Too Much?: Contributions to 401(k)." Accessed July 10, 2022.